When they’re used strategically, merchant cash advances (MCAs) can help a business move quickly. The global merchant cash advance market is projected to see a compound annual growth rate of 7.2% from 2024 to 2032 as more businesses use this type of financing. But when MCAs are used out of urgency, they can create more problems than they solve.

Below, we’ll explain how merchant cash advances work, how to apply for one, and how to avoid getting stuck with the wrong kind of financing.

What’s in this article?

• What is a merchant cash advance, and how does it work?
  
• How to apply for a merchant cash advance
  
• Pros and cons of merchant cash advances
  

What is a merchant cash advance, and how does it work?

A merchant cash advance is a cash injection that your business repays through a percentage of future sales. You receive the funds up front, and you pay back the provider as you earn. Unlike with loans, you’re selling a portion of your future revenue, not paying interest over time. The cost is fixed up front.

This difference is why certain lending regulations, such as interest rate limits, don’t apply to MCAs. That legal gray area has drawn scrutiny from regulators, but it’s also the reason why MCAs are typically faster and easier to access than traditional loans. Businesses can get funding within days and often don’t have to provide collateral. However, that speed can come at a cost. A $20,000 fee on a $50,000 advance isn’t unusual, and because it doesn’t scale down if you repay early, you might be paying a triple-digit effective annual percentage rate (APR) without realizing it.

Originally designed for retail and hospitality businesses with steady credit card sales, MCAs have expanded to serve a wider range of businesses. Here’s an example:

• Your business receives a lump sum of $50,000 from the MCA provider.

• You agree to pay back a fixed total amount with a flat fee called a factor rate. A 1.4 factor on $50,000 means you owe $70,000.

• Repayment is automatic. The provider collects a percentage of your daily sales until the total payback amount is reached. If you have a strong day with $1,000 in card sales and a 10% holdback rate, $100 goes to the MCA provider, and you keep $900. If sales are slow, the payment shrinks accordingly.

• Because payments vary with revenue, there’s no defined end date. The faster you repay, the higher the effective cost. If you pay back $70,000 in 6 months, the annualized cost is steeper than if you repay the same amount in 18 months.

How to apply for a merchant cash advance

One reason merchant cash advances are so widely used is that they’re easy to access. Compared with traditional business loans, the application process is fast, includes little paperwork, and often doesn’t require collateral or strong credit. In many cases, you won’t even fill out a formal application, especially if you’re using a platform with integrated financing.

Here’s how the process typically works:

If you’re using Stripe

For businesses that use Stripe to process payments, the steps are simple:

• You don’t have to go through a credit check or long application process: Stripe Capital assesses eligibility behind the scenes using your payment volume and account history.

• If you become eligible for a financing offer, you receive an email and can view your offer in your Dashboard under the “Capital” tab.

• Once accepted, the advance is deposited into your Stripe account, typically in as few as 1–2 business days.

• Payment of your financing occurs automatically by deducting a percentage of your Stripe sales.

If you’re applying through a third-party MCA provider

The process is still simple, but you have to take a few more steps.

Find a reputable provider

Some MCA providers have clear, straightforward terms, while others obscure costs, enforce aggressive repayment schedules, or include risky contract clauses. Make sure you compare factor rates, repayment terms, total costs, and track records. Be cautious of cold outreach or providers that push you to sign quickly.

Submit basic business information

The application is usually short. You’ll share:

• Legal business name and entity type

• Time in operation

• Monthly or annual revenue

• Industry category

Provide recent sales data

MCA providers will typically ask for 3–6 months of business bank statements and recent credit and debit card processing statements. They’re evaluating how much revenue comes in, how steady it is, and how likely you are to generate enough sales to repay the advance.

If you’re applying through a payment platform that processes your transactions, you might not need to upload anything. That platform can underwrite using your built-in sales data.

Expect a soft credit check

Many providers will review your credit—but usually through a soft pull that doesn’t affect your score. The credit score requirements are typically less stringent than with traditional loans. Some providers require a personal guarantee, which means you’re personally liable if the business can’t repay. Collateral is usually not required.

Carefully review the terms

If approved, you’ll get a formal offer with:

• Advance amount

• Factor rate (e.g., 1.3)

• Holdback rate or repayment schedule

• Total amount to be repaid

Make sure you understand how payments are collected (e.g., 10% of daily card sales), whether the contract includes minimum payments even on slow sales days, whether there are restrictions on early repayment, and any additional fees or legal clauses.

Get funded

Once you accept the offer, funds typically hit your account within 24–48 hours. Some providers deliver same-day funding. If repayment comes from card sales, your MCA provider will coordinate with your payment processor to take the agreed percentage. If repayment is via bank debits, you’ll need to authorize regular withdrawals from your business account.

Once live, repayment happens automatically until the total amount (advance + fee) is fully collected.

Pros and cons of merchant cash advances

Merchant cash advances can be a lifeline or liability, depending on how and when you use them. They’re fast and flexible, but they can be more expensive than other financing tools.

Here are the benefits and drawbacks:

Pros

• Fast access to funds: You can often get approved and funded in as little as 24 hours. The application has no lengthy underwriting and minimal documentation. If your business runs on a platform such as Stripe, the process can be faster.

• Easier approval than for traditional loans: MCAs are sometimes available to businesses that can’t access loans from traditional banks. You don’t need strong credit, a detailed business plan, or hard assets. Approval is based more on your sales volume than your credit file or time in business.

• More manageable repayment: Because repayment is tied to a percentage of daily sales, you pay more when business is strong and less when it slows. This dynamic structure can ease the strain on cash flow during slow periods, especially for seasonal businesses or those with unpredictable volume.

• Fewer restrictions on how funds are used: You’re typically not locked into spending the funds on a specific purpose. You can use the capital however you think is appropriate for your business. That flexibility lets you respond quickly to changing business needs without seeking approval or justifying your spending.

• No hard collateral: MCAs usually don’t require you to pledge physical assets. The provider “secures” the advance through your future receivables. However, many contracts include personal guarantees, so read closely.

Cons

• High cost of capital: MCAs are often an expensive form of business financing. Instead of interest, you pay a flat fee based on a factor rate, which can make for a high effective APR. The cost is fixed, and there’s no discount for early payoff, which can make MCAs financially painful if not used carefully.

• Daily or weekly repayment: Repayments come out daily or weekly, which can add pressure, especially during slower stretches. Some contracts include minimum payment clauses that don’t scale down with lower sales, which puts added stress on your working capital. If your margins are already thin, these withdrawals can hurt you.

• No benefit to early repayment: You’ll pay the same fee no matter how quickly you repay the advance. Fast repayment just increases your effective annual cost. Some contracts don’t allow early repayment, or they give you no flexibility once the fee is locked in.

• Doesn’t build credit: Most MCA providers don’t report repayment to credit bureaus. That means successfully paying off an MCA doesn’t help improve your credit score or build your borrowing track record. So even though MCAs are accessible, they don’t help you qualify for other kinds of financing.

• Risky or confusing contract terms: Because MCAs aren’t loans, they’re not subject to the same lending regulations. Some contracts include problematic clauses, such as confessions of judgment, daily bank account sweeps, or strict processor lock-ins. Stacking advances (taking out one MCA to pay another) can spiral quickly into unsustainable debt.

Merchant cash advances are fast, flexible, and accessible, but they can become risky if used without a clear plan. It’s easy to underestimate the risk or overestimate your ability to repay these kinds of advances. Always read the agreement in full, and consider having a financial adviser or attorney review it with you. If you’re considering a merchant cash advance, make sure you understand the full cost and have a realistic path to repayment.